1. The assessee-HUF has filed these three wealth-tax appeals for the assessment years 1973-74 to 1975-76 against a combined order of the Commissioner, Gujarat-I, under Section 25(2) of the Wealth-tax Act ("the Act"). As the issue involved for all the three years is a common one, these appeals are conveniently disposed of by a common order.
2. On examination of the wealth-tax records, the Commissioner noticed that the WTO had wrongly allowed a deduction of Rs. 3,75,000 in each assessment year from the value of an urban asset, namely, "Mangalbag Bungalow" and thus the levy of additional wealth-tax had been undercharged. The amount of Rs. 3,75,000 deducted was of a loan which was obtained from Harshavadan Mangaldas Investment Co. on the mortgage of the aforesaid urban asset. This debt was claimed by the assessee as deduction against the value of immovable property, i.e., "Mangalbag Bungalow", and the same was allowed by the WTO for the three years. The amount of loan was utilised by the assessee for making advances to Aryodaya Mills Ltd. and Victoria Mills Ltd. The Commissioner was of the view that as the loan obtained against the pledge of the immovable property has been lent out for the purpose otherwise than dealt with in Rule 1(a) of Paragraph B of Part I of Schedule I to the Act, the same could not be given as a deduction from the value of urban immovable asset. He further observed that "though the debt of Rs. 3,75,000 is allowable as a deduction against the movable asset, and thereby the total wealth will remain unchanged, the levy of additional wealth-tax will undergo an upward revision". Finding this error prejudicial to the interests of revenue in the assessment orders of the WTO for the three years under appeal, he set aside those orders with a direction to the WTO to re-do the assessments in accordance with law.
3. Shri S.S. Bagai, the learned counsel of the assessee, contended that the treatment given by the WTO in each assessment was quite correct and the order of the Commissioner was erroneous. He submitted that the ownership of an immovable property consists of a bundle of rights and when a mortgage is taken against such property, the owner's rights gets diminished by the mortgagee obtaining such rights in the mortgaged property. He invited attention to Section 58 of the Transfer of Property Act in support of this proposition and further submitted that in law what remained with the owner after mortgage was equity of redemption and the owner was no longer owner of full property. It was next stated that for the purpose of determining the market value of such a property, it will be an appropriate method to deduct from the market value, the value of encumbrance, i.e., the mortgage loan amount.
It was next contended that the deduction of mortgage loan will be a part of arriving at the value of a mortgaged immovable property which is an asset by itself under Section 7 of the Act and it is not a deduction of the type which is referred to in Rule 2 of Schedule I. He also relied on the Gujarat High Court's decision in CWT v. Smt.
Shirinbanoo  102 ITR 735, where the scope of this rule was considered in the context of a mortgaged property as the revenue had referred to Rule 2 under consideration here.
4. On behalf of the revenue, it was contended that the view taken by the Commissioner was correct and attention was invited to Paragraphs A and B of Part 1 of Schedule I. It was submitted that the value of an urban asset has to be determined with reference to the provisions of those two paragraphs so far as the charge of additional wealth-tax was concerned and deduction mentioned in Rule 2(a) in Paragraph B alone could be given and not the mortgage loan deduction as was done by the WTO. It was pointed out that for the assessment years for which the reference was decided by the Gujarat High Court in CWT v. Smt.
Shirinbanoo (supra), Rule 2 was not applicable as it was introduced with effect from the assessment year 1971-72 only.
5. On a careful consideration of the rival submissions, we find force in the submissions made by Shri Bagai appearing on behalf of the assessee. Section 58 of the Transfer of Property Act clearly lays down that a mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced. A mortgage thus bestows certain rights in the immovable property on the mortgagee reducing correspondingly the ownership rights of the mortgagor. What type of rights are transferred depends on the form of a mortgage but it is undisputed that mortgage of any type grafted on an immovable property will attenuate the full ownership rights of the mortgagor. This being so, the asset in possession of the mortgagor will be known as an encumbered asset. It is this asset which will have to be valued in the case of a mortgaged immovable property belonging to an assessee under Section 7. The method of valuing such an encumbered asset usually is to ascertain the market price on the particular valuation date of the asset without encumbrance and deduct therefrom the value of encumbrance and, thus, arrive at the value of the encumbered asset. In other words, even for the purposes of determining the value under Section 7, the true nature of the asset belonging to an assessee will have to be considered and if such an asset is encumbered by a mortgage, what is to be valued is the encumbered asset itself. It can also be said that what is to be valued in such a case is the property rights in an immovable property, which in the eye of law belong to an assessee. If such rights are less than that of full ownership as known to law, then only value of rights belonging to the assessee can be the subject-matter of charge of wealth-tax. This is the position which has certainly been considered by the Gujarat High Court in the case of Smt. Shrinibanoo (supra}, and in our view is in accordance with that judgment. It is true that Rule 2 in Schedule 1 was not applicable for the assessment years 1965-66 and 1966-67 under consideration of the Gujarat High Court, but the reference to the rule was made by the counsel of the revenue and the High Court considered that argument and while dealing with that, it dealt with the scope of that rule. In our opinion, that decision of the High Court supports the stand taken by the assessee. We quote the relevant portion from the head note of the High Court's judgment : Held, that, according to Section 7 of the Wealth-tax Act, the value of any asset, other than cash, would, for purposes of the Act, be the price which in the opinion of the Wealth-tax Officer it would fetch if sold in the open market on the valuation date. It is no doubt true that for purposes of determining the net wealth which is the basis of the liability of wealth-tax the amount by which the aggregate value of an asset of a person exceeds the aggregate value of the debts is to be looked into. But, nonetheless while estimating the valuation of an encumbered asset, the price which such asset would fetch, if sold in the open market, is first to be ascertained and the only method of evaluating an encumbered asset is to consider the valuation of the asset less the valuation of encumbrance thereon.
On a plain reading of Rule 2(a) of Paragraph B, which has been made effective from the assessment year 1971-72, it is clear that it permits deduction of any debt incurred for purposes of acquiring, improving, constructing, renewing or reconstructing an urban asset while valuing such asset. It does not provide for the inclusion of any debt which is secured on property. It provides for inclusion of any debt which is incurred for the above purposes irrespective of the fact whether it is charged on the property or not. In that view of the matter, therefore, the contention of the revenue that exclusion of a debt charged on the property is not permissible while evaluating an encumbered property is not well-founded. While aggregating the value of all assets for purposes of computation of net wealth, the value of a particular encumbered asset is relevant and in estimating the value of such an encumbered asset, it is the price it would fetch if sold in the open market that is relevant. It is only after excluding the amount of mortgage debt which is the valuation of the encumbrance that one gets the value of an encumbered asset. Therefore, the Tribunal was perfectly justified in reaching the conclusion that while estimating the value of an encumbered asset in the particular assessment years in reference, the assessee was entitled to claim deduction of the amount of the mortgage debt in evaluating the encumbered asset. (p. 736) We may also point out that the question of charging of additional wealth-tax comes up under item (2) of Paragraph A of Parti of Schedule I and there in the opening part what is referred to is "where the net wealth of the individual or HUF includes the value of any asset, ...".
The applicability of rate of tax, it is clear, follows after the net wealth has been determined. For the purposes of determination of net wealth, the value of an encumbered asset has to be fixed as per Section 7 and the deduction for mortgage loan as in the assessee's case will be a part of determination of the market value itself of the mortgaged immovable property. Rule 2(d) in Paragraph B will provide for deduction wherever applicable after the value of encumbered asset is fixed.
6. In view of the above discussion, we hold that the treatment accorded by the WTO in the three assessment orders is correct in the eye of law and the view taken by the Commissioner is erroneous. Consequently, we set aside the combined order of the Commissioner under Section 25(2) and restore the assessment orders passed by the WTO.7. The assessee's counsel also had objected to the Commissioner's order setting aside the whole assessment when only a specific issue according to him needed modification. Relying on the Delhi High Court judgment Addl. CIT v. J.K. D'Costa  133 ITR 7, it was contended that the total setting aside of the assessment orders was unwarranted. The argument of the assessee's counsel on this score also is sound but we need not decide this aspect of the matter as we have already set aside the combined order of the Commissioner and restored the assessment order of the WTO.